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Upcoming changes make CRA's VDP less attractive to taxpayers

Changes to the Voluntary Disclosures Program (VDP) set to take effect March 1 will make the initiative far less attractive to taxpayers and may lead to its effective demise, Canadian tax lawyer David J. Rotfleisch tells AdvocateDaily.com.

In mid-December, the Canada Revenue Agency (CRA) released the final version of the changes to the VDP, after allowing a public comment period for the original changes proposed last summer.

The VDP, Rotfleisch, founding tax lawyer with Rotfleisch & Samulovitch Professional Corporation, explains, allows taxpayers to come forward to correct any inaccurate or incomplete information or disclose information that was not previously reported.

Under the current program, taxpayers must satisfy four requirements in order for a voluntary disclosure to be accepted, including: a penalty owing; no ongoing enforcement action; the year in question must be at least one year old, and the disclosure must be complete.

If the CRA accepts the disclosure under the VDP, the taxpayer will avoid criminal tax evasion prosecution and gain benefits from the waiver of civil tax penalties and partial interest relief, says Rotfleisch.

The changes proposed last year, he says, ultimately narrow eligibility for the VDP, reduce the benefits of disclosing, and impose additional requirements on applicants. After the changes are implemented, Rotfleisch says the VDP is expected to shift from the current “one size fits all” approach to a two-track system and will require taxpayers to meet a fifth condition in order to qualify — including a payment of the estimated taxes owing when making the application.

“Beyond the addition of a fifth condition of a valid disclosure is the introduction of two separate ‘tracks’ for the processing of disclosure applications. Henceforth, all disclosure applications will be assigned to one of the two tracks,” says Rotfleisch.

“The general program will offer taxpayers much the same relief as the current and historical program; criminal prosecution will be waived, all penalties will be deleted and partial interest relief will be granted.

“The limited program severely modifies the relief offered; taxpayers will not be referred for criminal prosecution and will not be charged the civil gross-negligence penalties. However, normal late-filing penalties and full interest will be applied,” he says.

The final version of the rules released in December left the original proposals substantially intact, says Rotfleisch, although there was a slight improvement to the “adverse changes.”

For example, Rotfleisch adds, paragraph 20 was slightly modified to eliminate the need for the VDP to examine the taxpayer’s “culpability,” and a new paragraph adds language stating that the existence of a single factor will not necessarily result in a request being assigned to the limited program.

However, he says, “no feedback was given to stakeholders who made submissions. The time frame to move to the new rules is very tight and doesn't allow for more input from stakeholders.”

Ultimately, says Rotfleisch, many taxpayers who were potential VDP candidates under the old rules will either not qualify under the new program, or will qualify for the limited track but won't know this in advance, as the CRA has discretion to determine the track.

“Anyone who can't pay the estimated tax bill will no longer qualify. Anyone who has multiple years or issues won't know if they qualify for limited or general protection,” he adds.

 “The current rules are far more generous and anyone with tax issues considering a voluntary disclosure should submit under the old rules where there is certainty as to outcome instead of the new rules which will be a learning curve for the CRA and for tax practitioners,” says Rotfleisch.

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